Uncertainty Reigns Supreme

The VIX indicator typically shows higher levels when fear, doubt and uncertainty rise to a level of panic. That often subsides quickly, but not this time around.

The fear of the unknown around the effects from the coronavirus loom large. Many cases are popping up daily and the death rate is climbing. Nobody seems to have a handle of when this will be under control. Social distancing seems to be working a bit, but it's not arresting the problem at all.

With the heightened uncertainty the stock market has taken a tremendous hit. The economic impact of this virus from an abrupt shutdown in most towns and cities is devastating. Further, businesses big and small are needing to make some big decisions about their future. It could not have come at a worse time for most, who may lose their jobs as the economy heads into a nasty recession. Some estimate the GDP for Q2 might be down 20%! That is 1/5 of a $22 trillion dollar economy!

Market volatility has been elevated like never before. The VIX indicator typically shows higher levels when fear, doubt and uncertainty rise to a level of panic. That often subsides quickly, but not this time around. The 20 ma (moving averages) for the VIX is around 57 right now. To put that in context, that is the average daily level over the past month.

Historically, the average level of VIX is around 18-20. During the financial crisis in 2008/09 the 20 ma peaked around 50, so we are in record territory again. The elevated VIX and sustained levels explain why there are so many big swings.

With a VIX around 80 (which we saw) there is a 66% chance of a 5% move each day in a month. Hence, expect 5% moves on 20 of every 30 days. There is no magic here, but it is shocking nonetheless. As you might expect, these moves happen in both directions.

With higher volatility comes elevated option prices, calls and puts. The price of protection has risen significantly, and with the ranges widening out on the upside and the downside, even call plays for a bounce/rebound are extremely expensive.

Play it tight, conservatively and hold a slew of cash. This condition won't last too much longer, but better to be sure than to step into a mess in the high volatility pool.

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At the time of publication, Bob Lang had no position in the securities mentioned.

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